How do we deal with ‘chipageddon’?
Paul van der Tang, Purchasing Director at Offshore Electronics, has worked closely with customers throughout the last 18 months, a time which has laid bare the shortages currently affecting the global electronics industry. In this article, van der Tang analyses today’s market and offers five key points to manage the effects of what some are calling ‘chipageddon’.
Semiconductors (SCs) are the unseen workhorses of modern industry and they sit at the heart of almost every electrical product. This places huge pressure on those supplying the raw materials necessary to make SCs and printed circuit boards (PCBs), not to mention the contract manufacturers responsible for fulfilling customers’ orders. Unsurprisingly, the impact of a shortage is felt almost immediately and often creates a knock-on effect that can interrupt output for months, if not more.
Recent events have brought these pressures into sharper focus. Last year gamers were left waiting much longer for graphics cards after some of the industry’s biggest names delayed their latest line of products. Similar problems were also seen elsewhere. Apple, for example, had to stagger the release of its latest smartphone and the US car industry was left idling as the effects of chipageddon began to bite.
What is Chipageddon?
Chipageddon is essentially a worldwide shortage of silicon and other materials necessary for the manufacture of SCs. The reasons behind the shortages are complex – some of which existed even before the COVID-19 pandemic made matters considerably worse. Increased demand for electronics across the global economy has been given as one explanation, while others believe the growth of ‘just in time’ manufacturing practices are to blame. Beyond this, there are also regional issues that appear to have played a part – droughts in Taiwan stalled one of the world’s biggest producers, while the US Government’s 100-day review into domestic production only served to increase the pressure on international supplies.
The exact causes of chipageddon are arguably unimportant. Some factors may be more responsible than others but it ultimately boils down to an imbalance between supply and demand. Society’s dependence on digital devices means demand for SCs will remain consistently high, even without shortages, and the expectation that current problems will ease quickly seems hopeful given the current climate. Indeed, analysts like Glenn O’Donnell, a vice president research director at advisory firm Forrester, believe the shortage could last through 2022 and well into 2023.
Almost every organisation working with electronics will have faced delays over the last 18 months – even those that anticipated challenges. CEMs are arguably under the most strain, having to manage the demands of customers on one side and long, expensive lead times from suppliers on the other. That said, recent experiences have shown measures can be put in place to minimise the most difficult aspects of procuring necessary materials.
Offshore Electronics, for example, recently signed a sole source agreement with NCAB Group to secure its own supply of PCBs, the first piece of the puzzle, before sourcing any SCs. Without them there would simply be no product. This certainty gives customers a clearer view of what to expect moving forwards.
Moves like these may seem counter-intuitive, especially during a squeeze, but actually represent the type of action needed to navigate difficult periods. While it’s right to recognise the severity of the current situation, conditions will surely improve if businesses adopt a more pragmatic view over the next two years. With that in mind, here are five top tips for those looking to secure their supply of product.
This should be a given considering how restricted the market is right now. Few, if any, businesses have enough sway to secure what they need without waiting, especially when competing against some of the biggest name in electronics. However, small changes can cut lead times if parts are able to be changed. Offshore Electronic’s skill in offering credible substitutes has allowed its customers to get parts far quicker. In the last few weeks, the business has specified alternative SCs, connectors, passives and electromechanical parts – the benefit here is the customer only has to look at the data to provide approval, rather than having to do all the research.
Customers who are firm with their purchase orders are more likely to secure what they need compared to those who wait – that goes for individual parts as well as completed assemblies. Offshore’s recent agreement with NCAB Group offers a good example – it has been able to exploit a worldwide network of manufacturing facilities to reduce bottlenecks and keep lead times to a minimum. In turn, this has allowed Offshore to compete in the PCBA market and fulfil orders for its customers. Commit to your orders, even if they are several months or years ahead.
Businesses always want to limit disruption where possible, especially during a supply shortage. But this can only be done when a CEM has the power to make decisions on behalf of its customers – including material price increases and minimum order quantities. It seems sensible to keep communication ongoing during difficult periods, but placing trust in partners will mean they can secure what’s needed without delay.
CEMs have a wealth of industry knowledge customers can use to make more informed decisions. Offshore Electronics, for example, is run and managed by a team of engineers who have an in-depth understanding of the market, as well the technical expertise needed to improve products. This knowledge has been shared in the form of regular market updates throughout the current squeeze, keeping customers notified of the smaller changes that could have a bigger impact further down the line. Feedback has shown this insight to be invaluable and has encouraged businesses to get in contact for further support.
Long lead times may be inevitable but smart decisions can still be made that save money. For example, businesses can capitalise on better pricing by opting for longer shipping times via sea freight. Committing to these longer schedules gives CEMs the opportunity to secure components against more competitive and consistent pricing. On a more practical level, it’s also useful to buy larger quantities when you can as this keeps more of what you need on the shelf.